Editor’s note: This article was first published in June 2013. “This crisis” and “this recession” refer to the 2008-2013 downturn, and “the cycle that is about to begin” refers to the years after 2013.
In a bull market and a healthy economy, there is never a shortage of excellent investment ideas to grow your money. The trouble comes with volatility: suddenly it gets much harder to find profitable investments for your portfolio, and what often happens is that the strategies that worked in previous recessions turn into completely wrong investment ideas, even when the experts themselves recommend them.
In other words, bearing in mind that many of the strategies of the past have collapsed in this crisis, remember that these three investment ideas may not work in future recessions. They may not even work in the cycle that is about to begin.
1. Low-volatility stocks are always safer
During a crisis, some stocks are much less volatile than others. A low-volatility investment strategy means choosing stocks that, while all the markets are falling, fall by less or even start to rise, becoming a safe haven. The problem with these stocks is that when it’s all over and the strong rebounds begin, they barely move, and they might even start to fall, even though that makes no sense.
On the other hand, when stocks become “very popular” with investors, there’s also the risk of overinflated prices and surprises that can arrive overnight. The most logical reason they don’t rise when the market recovers is simply that investors want to take advantage of the gains in other, much more beaten-down stocks.
We could swap that investment idea for another. Historically, in a high percentage of cases, the stocks that rose sharply while all the markets were collapsing suffered significant falls once the market recovered. Of course, this idea or strategy could itself change next time.
2. Gold is a safe investment
“Gold is a good investment because it goes up over time.” We’ve seen those words, which we also used to hear about house prices, come to nothing. Anything that goes up can turn into a bubble when the time comes, and we’ve seen that gold and silver are no exception, with many prestigious expert analysts setting price targets for gold as high as 8,000 dollars. Besides, although gold has historically risen when the stock market fell, the truth is that if a crisis drags on too long and turns into a depression, and many countries are forced to sell their gold, its price could drop sharply.
Don’t forget that in the investment world there’s a lot of money belonging to people who make a living betting against whatever is popular, so there is no such thing as a safe-haven investment: it’s only a safe haven for as long as an elite allows it to be. In investing, nothing is certain; there is always a risk.
3. High-dividend stocks are safer than other stocks
As with low-volatility stocks, stocks with good dividends have become the cure-all for investors during this recession. It makes sense: if the whole market is going to fall, at least they’ll pay me the dividend and keep my losses down.
Ironically, though, the buying frenzy for this type of stock has made them volatile, and at the same time large companies that used to pay good dividends have been forced to suspend or cut them. That reminds investors once again that everything changes in investing and what works today may not work tomorrow, especially if everyone is convinced that the strategy works, because the only rule that holds on the stock market is that “when everyone can see it coming, it never arrives.” (Read: How to build a dividend investing strategy to earn 10% a year.)
Finally, everyone should know that what has kept working for almost 100 years is value investing, the method of Graham and Buffett. It basically means buying a great company at a low price, a company the market undervalues, always thinking long term, so that when a stock falls 15% it isn’t a tragedy but an opportunity to buy more cheaply.
Further reading
- The most profitable investment is paying off your debts
- A free beginner’s course on stocks and financial derivatives
Featured image: Ank Kumar, CC BY-SA 4.0, via Wikimedia Commons.
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